Optimal Need-Based Financial Aid

Abstract

We study the optimal design of student nancial aid as a function of parental income. We derive optimal nancial aid formulas in a general model. For a simple model version, we derive mild conditions on primitives under which poorer students receive more aid even without distributional concerns. We quantitatively extend this result to an empirical model of selection into college for the United States that comprises multidimensional heterogeneity, endogenous parental transfers, dropout, labor supply in college, and uncertain returns. Optimal nancial aid is strongly declining in parental income even without distributional concerns. Equity and eciency go hand in hand.

Optimal Linear Income Taxation and Education Subsidies under Skill-Biased Technical Change

“…Since investment in education generates infra-marginal rents for all but the marginally skilled individuals, the government likes to tax education on a net basis to redistribute income from high-skilled to low-skilled workers. This nding is in line with Findeisen and Sachs (2016); Colas et al (2020), who also analyze optimal education policies with discrete education choices. 20 Furthermore, education subsidies (rather than taxes) generate what we call wage compression eects.…”

The Indirect Fiscal Benefits of Low-Skilled Immigration

“…This would likely increase the indirect fiscal effects of immigration as increased education leads to increased lifetime income and therefore increased tax payments. As shown in Colas, Findeisen, and Sachs (2021), this fiscal externality associated with attending college is quantitatively important. 64 Monopsonistic Labor Markets Amior and Manning (2020) emphasize that most of the immigration literature rests on the assumption of perfectly competitive labor markets.…”

“…Colas, Findeisen, and Sachs (2021) estimate average lifetime fiscal externalities of attending college ranging roughly $60,000 to $90,000, conditional on parental income.65 For the US, the authors show that the assumption that markdowns are exogenous is rejected by the data. 66 This is because the indirect fiscal effect is independent of the size of the native population.…”

The Indirect Fiscal Benefits of Low-Skilled Immigration

“…therefore increased tax payments. As shown in Colas, Findeisen, and Sachs (2018), this fiscal externality associated with attending college is quantitatively important. 64 Amior and Manning (2020) emphasize that most of the immigration literature rests on the assumption of perfectly competitive labor markets.…”

“…Colas, Findeisen, and Sachs (2018) estimate average lifetime fiscal externalities of attending college ranging roughly $60,000 to $90,000, conditional on parental income.65 For the US, the authors show that the assumption that markdowns are exogenous is rejected by the data.66 This is because the indirect fiscal effect is independent of the size of the native population. See also the discussion in Foonote 14.…”